How to Avoid Wage and Hour Trouble and What’s Coming Your Way

With lawsuits on the rise, we asked the experts how employers walk the line between compliance and consequence

Wage and hour laws across the country are changing. As the federal government eases up on employers, removing regulations and opting for a more hands-off approach, many states — California, in particular — have been passing their own labor laws to fill in the gaps.

It’s this ebb and flow of policy-making that has prompted us to cover a variety of evolving topics, from rising lawsuits to the cost of wage theft versus time theft to the overtime laws of every state. Keeping an eye on so many different facets of wage and hour laws is tough. Fortunately, it’s nothing our experts can’t handle.

In October 2018, we met with two such experts: Chester Hanvey, an associate director at the global consulting firm Berkeley Research Group (BRG); and Caroline Brown, attorney with the law firm Fisher and Phillips, a national labor employment firm that only represents employers. With the help of local employment law attorney Maria O. Hart, who moderated our wage and hour webinar, we sought out to better understand today’s wage and hour landscape.

What’s on the horizon? What’s already here? And what do employers need to know to stay on top of these changes and avoid getting into any wage and hour trouble?

Watch our wage and hour webinar

Know your exemptions

Some employees are exempt. Some employees are nonexempt. It sounds black and white, yet getting the logistics of these classifications correct is a major headache and the cause of numerous Fair Labor Standards Act (FLSA) violations each year.

Brown says the first step to avoiding trouble is to understand that the default for employees is nonexempt (i.e., not exempt from all the rules and regulations laid down by the FLSA). That means they’re entitled to minimum wage, overtime, and more.

Being “exempt,” on the other hand, can mean many different things. Sometimes it’s exempt from both minimum wage and overtime and therefore doesn’t require the same level of timekeeping necessary for managing nonexempt workers (though we still recommend it for salaried employees for a number of reasons).

Sometimes employees are exempt just from overtime and some of the requirements. Unfortunately, this variation in treatment might be what prompts so many of the most heinous FLSA mistakes.

“I will say that we’ve been seeing a lot more issues related to nonexempt employees,” says Hanvey. “[Such problems] tend to be off-the-clock work, timekeeping issues, rounding, and determining the regular rate of pay. I’ve seen a number of those cases lately.”

If all of this is sounding new and foreign, you’ll want to check out our FAQs page on what it means to have an exempt employee. There is a three-factor test:

  • They’re paid on a salary basis.
  • They earn more than $23,660 a year.
  • They fulfill a creative, professional, or administrative role.

There are also exemptions for other workers such as farmers, drivers, and mechanics, so don’t make the mistake, as many do, of assuming all hourly workers are nonexempt. Or that all salaried workers are exempt. Some salaried workers earn overtime. And some hourly workers legitimately do not.

Either way, you need good records, even for exempt employees, as Brown explains. “I don’t mean that you need to go make a memo about why you’ve classified [a certain employee] as exempt, but you do want to have some sense and make sure you are only treating them as exempt because of the appropriate requirements,” she says.

For example, if you have an employee who meets just one part of three-factor exemption test, you might not have classified them correctly. If in doubt, always seek the advice of a professional.

Know the difference between contractors and employees

Similar to understanding the difference between your exempt and nonexempt employees, it’s important you don’t overstep the boundary between employees and contractors.

To do that, Hanvey says it’s important to first define what constitutes an employee versus a contractor. For this, he points employers toward the Department of Labor (DOL) and the IRS.

“Generally speaking, a critical factor and something that can be measured reliably is the issue of control,” he says. “To what degree is the employer controlling the work of the worker?” Hanvey says these are the type of questions his team asks:

  • Does the employer set the schedule for the worker?
  • Does the employer give instructions, or is there a detailed policy manual that tells the worker exactly what they need to do?
  • Is the worker provided with training?
  • Is the worker provided with equipment?

As a social scientist, Hanvey has developed an approach to measuring the status of an independent contractor that involves collecting data from multiple parties. “We’ll usually go to the workers,” he says. “We’ll observe them, we’ll look at what they’re doing, we’ll even follow them around and do time-in-motion studies to track what they’re doing. We’ll look at how often they’re interacting with the company.”

Hanvey has found that it doesn’t necessarily matter how frequently someone works with the company, but the nature of those interactions does. “Are they relaying information? Or are they receiving instructions? Those two things are different, depending on whether they’re being controlled by the employer.”

This is an issue Hart also knows well. “An ounce of prevention is worth a pound of cure,” she says, recommending that employers pay for an hour or two of consultation time with an attorney, prior to classifying anyone they hire as an independent contractor.

“If your attorney recommends you classify your new hires as independent contractors, ask the attorney to provide you with an independent contractor agreement,” says Hart. “They should have a template you can tweak so you can still protect your business interests and competitive advantages. It’s important your new hires understand and respect your confidential information. You can require independent contractors to execute confidentiality agreements as part of their onboarding with your company.” Once you’ve worked out which positions should go to contractors and which will require employees, you’ll want to adjust your job postings to reflect that information.

“The biggest consequence for business owners who misclassify workers is tax fraud,” says Hart, and that’s besides it being an FLSA violation. “Companies that improperly classify employees as independent contractors can face state and federal penalties, since wage and hour claims are usually initiated at the state level but can easily progress to the federal level, depending on the size and nature of the business. And let’s not forget the IRS — they would be involved in a case like this as well.”

Know your state labor laws

For employers with franchises or employees in multiple states, one of the more complicated problems to solve is dealing with the unique employment laws of each state. Some, for instance, require predictive scheduling. Others have their own overtime laws.

In her work with employers working across state lines, Brown says she often asks her clients questions to help them figure out how to create consistent company policies. That starts with asking what they would do if the law didn’t require anything.

Brown says most employers don’t want 50 different policies, but they can live with more than one. “Typically, they want as few policies as possible. … So what we often wind up doing is that if they do operate in California, or in a West Coast state, or maybe in New York, we’ll look at those states first and try to set our baseline for the policy.”

From there, Brown and her clients decide what parts of the company’s policy could be extended to other states, and what things should only apply to workers in that more complicated state. “A lot of times, they go with a more favorable policy because it’s just too administratively burdensome otherwise,” she says.

As mentioned before, one reason there are so many different wage and hour laws from state to state is policy changes within the federal government. “I think there’s a general perception that the current administration is a little bit more business-friendly,” says Hanvey. “For example, there have been a couple of administrator interpretations at the Department of Labor that were withdrawn. They were written under the Obama administration and withdrawn under the Trump administration.”

Hanvey goes on to say that those initial interpretations were widely viewed to be very narrow. Some, for example, made it very difficult for employers to classify people as independent contractors.

“What’s happening, or what I’ve been seeing in terms of trends,” he says, “is a perceived lack of attention to these issues, or at least reduced attention to these issues at the federal level, and a lot of states and municipalities are stepping in to fill what they consider to be enforcement gaps. As a result, it feels that having a more ‘business-friendly’ administration would be a great thing for employers, but what you end up with is different standards in different states and municipalities, particularly for larger employers or multi-state employers, which is really difficult, on a compliance side, to keep up to date with.”

Know the nuances of your industry

It almost goes without saying: Different industries have different regulations. What works for a crew of construction workers may not be feasible for those working in cosmetology.

“The underlying issues are actually global,” says Brown, “but each industry has its own nuances.”

To better understand those nuances, Brown recommends employers check the U.S. Department of Labor website, which does have some industry-specific pages. But she cautions employers to take even these with a grain of salt, as most are inconclusive. “There are so many nuances to each of these concepts that they simply cannot put all of that into a fact sheet,” she says. “But I do think they are a good starting point in helping employers flag different issues and figure out where they need to go a step further in getting help.”

From there, Hanvey recommends employers consult an attorney who’s more of an expert on the laws of their industry. “This is one of the things I study for a living, and I wouldn’t feel comfortable saying with 100 percent certainty that I understand all the nuances of every business. So I do think this is an area where you would definitely benefit from working with an attorney.”

Looking ahead: Wage and hour laws in 2019

This could very well be a big year for employers, but it’s unlikely that federal regulations will be the cause of any changes in wage or hour legislation.

For her part, Brown says she wishes many states would slow down a little. “I’m not normally a proponent for saying, ‘Let the federal law get involved,’” she says, but Brown admits that allowing 50 different states to all pass their own rules is tough on employers.

“What’s happened in the interim is that the states have moved forward, and now we have this mishmash of different approaches and different locations, which just makes it harder for employers,” she says. “So in many ways, if we’re going to wind up there anyway and have these kinds of regulations, I do wish that we would go ahead and do it on the federal level.”

Brown also points out that some states, including California, also seem to forget there are areas where the federal law is surprisingly stringent. She reminds employers to not just focus on state and local issues but to keep an eye on the federal side as well if they want to stay out of trouble.

And speaking of federal legislation, if you’ve been following the epic saga of the new overtime law, you might be aware that for now, changes are still on hold. This new regulation, if passed, would impact millions of workers across the country. Essentially, it would bring up the overtime salary threshold from $23,000 to some higher number, giving salaried employees who previously didn’t qualify the chance to earn overtime pay.

When the law was first proposed in 2016, that bar was set at $47,476. Since then, there have been rumors of a cap at $33,000. The only similarity is that from the beginning, the idea of such a major change has left employers holding a ticking time bomb.

Some made changes on their own, back when the law was first passed but not yet put into action. When the law was suspended by another judge, those who’d already made the change were left with an ethical dilemma — could they take back what had already been done?

Since then, employers have, to a degree, been living on borrowed time. Like so many wage and hour laws changing the economic and professional landscape, a new overtime threshold isn’t really in the realm of “will it happen” but “when.” And judging by the responses from our experts, it’s likely that if the feds don’t act soon, many states won’t have a problem stepping in to pass their own versions — for better or worse.

Watch our wage and hour webinar